An intriguing new catastrophe bond transaction has launched to the market according to our sources, with the $50 million Power Protective Re Ltd. (Series 2020-1) transaction being sponsored on behalf of a municipal water and electricity utility operating in the Los Angeles area of California that is seeking wildfire insurance protection.
Power Protective Re 2020-1 is the first wildfire catastrophe bond issuance to benefit a municipal utility and in fact the first cat bond covering any peril to benefit a municipal utility anywhere in the world.
The Los Angeles Department of Water and Power (LADWP) will be the ultimate beneficiary of the coverage and is the largest municipal utility operating in the United States.
The Los Angeles Department of Water and Power (LADWP) serves more than four million people and has been in operation since 1902 to supply water to homeowners and businesses in Los Angeles and the surrounding communities, supplying electricity since 1917 as well.
The municipal utility is seeking to secure catastrophe insurance coverage against wildfire risks in the region of California where it operates, as its infrastructure is exposed to wildfires.
But its infrastructure could also ignite wildfires, so presumably there is an element of wildfire liability protection as one of the driving motives for this visit to the capital markets.
The utility will get its insurance through an agreement with a protected cell of Aon’s Vermont-based White Rock cell captive vehicle, we understand.
Global reinsurance firm Hannover Re will reinsure the risks for White Rock and is set to interface with the capital markets, fronting the wildfire risks for the LA municipal water and electricity utility via a retrocessional reinsurance agreement with newly formed special purpose insurer (SPI) named Power Protective Re Ltd. we understand.
Power Protective Re Ltd. will issue a single tranche of Series 2020-1 notes, targeting $50 million of protection, which will be sold to cat bond investors and the proceeds used to collateralize the retro agreement with Hannover Re.
Hence, the coverage capitalised by the cat bond issuance is cascaded back to the municipal water and electricity utility with the assistance of Hannover Re and the White Rock vehicle, enabling the Los Angeles Department of Water and Power (LADWP) to benefit from the capital markets appetite for catastrophe insurance risk.
The notes will cover wildfire risk in a covered area within a region of California where the utility operates.
Coverage is on a parametric trigger basis, with a novel trigger construction based on reconstruction cost values within a wildfire perimeter, using data from EQECAT’s RCV database for wildfire risk.
We understand that the cat bond will feature a stepped payout mechanism attached to this parametric trigger, being able to payout 35%, 70% or 100% of its principal depending on the severity of the wildfire event.
The term of coverage will be three years, with maturity slated for December 8th 2023, we’re told.
The risk has been modelled using two scenarios for wildfire risk, an average level of fire risk and a high level, which is to factor in drier years where California wildfire risk can be elevated.
As a result, the notes come with two modelled expected loss numbers, we understand, of 0.63% annualised for average fire risk and 0.74% when modelled on a high fire risk basis.
With a parametric trigger based on a specific covered area of California and able to be activated by covered events burn perimeter’s impacting a certain level of reconstruction cost values from the EQECAT database, it seems like this structure is one that investors should be able to analyse themselves and make informed assumptions regarding the pricing they would need to assume this risk in catastrophe bond form.
The currently $50 million of notes to be issued by Power Protective Re Ltd. are being offered to cat bond investors with coupon price guidance in a range from 9.5% to 10.25%, we understand.
While a high multiple to expected loss, this is a unique cat bond deal unlike any others that have gone before. As a result it will take more sophisticated cat bond fund managers and investors to analyse and get comfortable with the deal, but the market should be easily capable of doing so.
But, no matter how innovative the structure, potentially the most important or groundbreaking fact with this new Power Protective Re cat bond deal is that a municipal utility is seeking disaster insurance, for a climate risk exposed peril, from the capital markets using an insurance-linked security (ILS).
Municipal utilities and other municipal entities all around the globe carry enormous disaster and climate related risks on their balance-sheets that they could be transferring, but often traditional insurance and reinsurance capital is insufficient, or inefficiently priced.
Hence the capital markets and the catastrophe bond can be an additional source of disaster and climate risk insurance for these municipal entities, to better protect their infrastructure and ultimately protect their service to their customers.
As a result this Power Protective Re cat bond shows a way for the ILS market to support municipalities disaster risk financing needs.